Excess Instalment Deductions
22.91. The present system of tax instalment deductions from salary or wages is well established. Deductions from salary or wages comprise over half the total collections of income tax. The system is accepted by both employees and employers and generally works satisfactorily. But there are several aspects of the system requiring examination.
22.92. The instalment deductions from salary or wages are based upon schedules in the Regulations to the Act. The main schedule provides for instalment deductions in relation to concessional allowances for dependants and for home loan interest to which a taxpayer may be entitled. An employee may formally notify his employer of any of these concessional allowances and the employer is then required to take account of this information in making instalment deductions. The main scale of instalment deductions has built into it some recognition of average concessional allowances for items other than dependants, such as superannuation contributions and medical expenses; but generally the aim is to ensure that total instalment deductions exceed the amount of final tax payable, so that for a very high percentage of salary or wage earnings without other income there are end-of-year refunds. In some cases taxpayers deliberately refrain from informing their employers of entitlements to dependant allowances and in this way voluntarily increase the amount of their refunds. Moreover, in recent years there have been indications that the application of the main schedule of instalment deductions is resulting in greater numbers of salary and wage earners with further tax payable at the end of the year: the taxpayers chiefly involved are those without dependants and with few other concessional allowances. In September 1972 an optional schedule was issued with the object of reducing the number of cases where a further tax payment has to be made after the end of the year.
22.93. It is apparent from submissions that some taxpayers favour instalment deductions being aligned more closely
with their final tax liability. It has also been put to the Committee that the rapid growth of end-of-year
refunds, mainly in the months of July, August and September, is leading to more pronounced seasonal movements in
the economy's liquidity—movements involving costs for the whole community. The
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end-of-year refunds
have grown from $507 million in 1970-71 to $772 million in 1973-74 and an estimated $930 million in 1974-75.
22.94. Under the present legislation an employee can reduce his tax instalment deductions to a figure closer to his final liability by special application to the Commissioner for a variation of the instalment deductions. In the Committee's view this procedure should be more readily available to employees and more widely applied. The present system of declaration forms supplied by employees to employers should be extended to include a number of concessional allowances in addition to those for dependants and for mortgage interest. Within the limits of a maximum yearly allowance, the extension ought at least to encompass employee superannuation and medical and hospital benefit fund contributions collected through employers, and deductible life insurance premiums where supported on the declaration form by details of policy number, name of payee, etc. as now required on return forms.
22.95. The reduction of tax instalment deductions in this fashion should be entirely optional in the manner of the present reduction for dependants: it would be solely up to the employee whether he wishes to take advantage of it. Where an employee claims reduction of instalment deductions other than for dependants, the employer would be obliged to apply an instalment scale that takes no account of concessional allowances. The implementation of a scheme of this kind will inevitably involve the Taxation Office in an expanded role in advising upon and policing the pay-as-you-earn system. But the work load on employers would not be significantly increased; and as is the case at present, employers would not be required to accept responsibility for the accuracy of the items claimed by employees.